How Technical Analysis Can Be Used To Forecast Future Spot Exchange Rates
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International Finance’s Midterm Exam
Student’s Name: ——————————————————————————————
Multiple Choice Questions please choose the correct answer:
1) World War I caused the suspension of the gold standard for fixed international exchange rates
because the war
A) cost too much money.
B) interrupted the free movement of gold.
C) lasted too long.
D) used gold as the main ingredient in armament plating.
2) In January 2002, the Argentine peso was officially valued at a rate of Peso 1.40/USD. More
recently the exchange rate is Peso 3.10/USD, thus, the Argentine peso ________ against the U.S.
dollar.
A) strengthened
B) weakened
C) remained neutral
D) all of the above
3) In a static (accounting) sense, a nation’s GDP can be represented by the following equation:
where C = consumption spending, I = investment spending, G = government spending, X =
exports of goods and services, and M = imports of goods and services.
A) GDP = C + I + G + M – X
B) GDP = C + I + G + X – M
C) GDP = C + I – G + X – M
D) GDP = C + I + G + X + M
4) ________ is the process of turning an illiquid asset into a liquid salable asset.
A) Liquidity
B) Securitization
C) Diversification
D) Portfolioization
5) A ________ transaction in the foreign exchange market requires delivery of foreign exchange
at some future date.
A) spot
B) forward
C) swap
D) currency
6) The BOP must be in balance but the current account need not be.
TRUE
FALSE
7) Mortgage loans in the U.S. that meet the guarantee requirements for resale to Government
Sponsored Enterprises and are conforming in every way are classified as ________.
A) Alt-A
B) subprime
C) prime
D) Alt-AA
8) A ________ is a derivative instrument created from bank-originated mortgages and loans,
combined with similar debt obligations into a portfolio, and then re-sold through investment
banking underwriters to a variety of investors.
A) Credit Default Swap (CDS)
B) Special Purpose Vehicle (SPV)
C) Collateralized Debt Obligation (CDO)
D) Arbitrage Pricing Tranch (APT)
9) LIBOR is an acronym for ________.
A) London International Banks Official Rate
B) Latest International Banking Official Rate
C) London Interbank Offered Rate
D) Latest Interbank Option Rate
10) A/An ________ is an agreement between a buyer and seller that a fixed amount of one
currency will be delivered at a specified rate for some other currency.
A) Eurodollar transaction
B) import/export exchange
C) foreign exchange transaction
D) interbank market transaction
11) The balance of payments is most like a(an) ________.
A) cash flow statement
B) balance sheet
C) income statement
D) proxy statement
12) ________ seek to profit from trading in the market itself rather than having the foreign
exchange transaction being incidental to the execution of a commercial or investment
transaction.
A) Speculators and arbitragers
B) Foreign exchange brokers
C) Central banks
D) Treasuries
13) A ________ transaction in the foreign exchange market requires an almost immediate
delivery of foreign exchange.
A) spot
B) forward
C) futures
D) none of the above
14) “Overshooting” exchange rate changes in response to an action of the Federal Reserve would
be an example of
A) a market inefficiency.
B) a market efficiency.
C) the Fisher Effect.
D) none of the above.
15) Members of the International Monetary Fund may settle transactions among themselves by
transferring Special Drawing Rights (SDRs).
TRUE
FALSE
16) In the foreign exchange market, ________ seek all of their profit from exchange rate changes
while ________ seek to profit from simultaneous exchange rate differences in different markets.
A) wholesalers; retailers
B) central banks; treasuries
C) speculators; arbitragers
D) dealers; brokers
17) ________ is the alteration of economic or financial fundamentals which are thought to be
drivers of capital to flow in and out of specific currencies.
A) Proportional intervention
B) Direct intervention
C) Indirect intervention
D) Hopeless intervention
18) The immediate impact on the balance of trade (BOT) for a country in deficit when there is an
immediate devaluation of its currency is likely to be an even larger BOT deficit than prior to
devaluation.
TRUE
FALSE
19) The post WWII international monetary agreement that was developed in 1944 is known as
the ________.
A) United Nations
B) League of Nations
C) Yalta Agreement
D) Bretton Woods Agreement
20) The International Monetary Fund (IMF)
A) in recent years has provided large loans to Russia, South Korea, and Brazil.
B) was created as a result of the Bretton Woods Agreement.
C) aids countries with balance of payment and exchange rate problems.
D) is all of the above.
21) Under a fixed exchange rate regime, the government of the country is officially responsible
for
A) intervention in the foreign exchange markets using gold and reserves.
B) setting the fixed/parity exchange rate.
C) maintaining the fixed/parity exchange rate.
D) all of the above.
22) Which of the following is NOT an attribute of the “ideal” currency?
A) monetary independence
B) full financial integration
C) exchange rate stability
D) All are attributes of an ideal currency.
23) The ________ is the difference between merchandise imports and exports and a measure of a
country’s international trade in goods and services.
A) balance of payments
B) current account
C) capital account
D) balance of trade
International Finance’s Midterm Exam
Int’l Finance – GOV 06 Midterm Exam – Good luck Page 5
24) The ________ was a contract, a derivative, which derived its value from the credit quality
and performance of any specified asset.
A) Collateralized Debt Obligation (CDO)
B) Arbitrage Pricing Tranch (APT)
C) Special Purpose Vehicle (SPV)
D) Credit Default Swap (CDS)
25) Which of the following is NOT a motivation identified by the authors as a function of the
foreign exchange market?
A) The transfer of purchasing power between countries.
B) Obtaining or providing credit for international trade transactions.
C) Minimizing the risks of exchange rate changes.
D) All of the above were identified as functions of the foreign exchange market.
26) Which of the following may be participants in the foreign exchange markets?
A) bank and nonbank foreign exchange dealers
B) central banks and treasuries
C) speculators and arbitragers
D) All of the above.
27) A common type of swap transaction in the foreign exchange market is the ________ where
the dealer buys the currency in the spot market and sells the same amount back to the same bank
in the forward market.
A) “forward against spot”
B) “forspot”
C) “repurchase agreement”
D) “spot against forward”
28) The important thing to remember about foreign exchange rate determination is that parity
conditions, asset approach, and balance of payments approaches are ________ theories rather
than ________ theories.
A) competing; complementary
B) competing; contemporary
C) complementary; contiguous
D) complementary; competing
29) ________, traditionally referred to as chartists, focus on price and volume data to determine
past trends that are expected to continue into the future.
A) Mappists
B) Trappist Monks
C) Filibusters
D) Technical analysts
30) The “tequila effect” is a slang term used to describe a form of financial panic called
________.
A) run on the market
B) speculation
C) contrary investing
D) contagion
Essay Questions please choose 4 questions out of the following:
1- List and explain the three attributes of the “ideal”currency. Why are these referred
to as “the impossible trinity”?
2- What is the difference between a direct foreign investment and a portfolio foreign
investment?
3- What does it mean CDO? Support your answer with diagram.
4- Explain how technical analysis can be used to forecast future spot exchange rates.
5- If a country is suffering deficit in the trade balance. What is the corrective action should be
taken? Support your answer with graph
6- What is meant by the term “overshooting?” What causes it and how is it corrected?
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